Debt Ceiling Predictions From Obama's Former Budget Director

Though the federal debt ceiling will be raised sometime this spring, when it is due to be eclipsed, according to Peter Orszag, President Obama's budget director for 2009 and most of 2010, Americans should expect a fight much like that for the Troubled Asset Relief Program, where market volatility and anxiety finally corral the votes needed to pass the bill.

Mr. Orszag spoke in East Hampton Saturday as part of the Hamptons Institute, a program co-sponsored by Guild Hall and the Roosevelt Institute. Originally slated to be interviewed by Steve Kroft of "60 Minutes," Mr. Orszag ended up speaking with Jeff Madrick, a senior fellow at the Roosevelt Institute and frequent contributor to "The New York Review of Books," when Mr. Kroft had to cancel his appearance.

The debt ceiling issue has gained steam in recent weeks, as Treasury Secretary Tim Geithner has warned of a potential inability to send older Americans their Social Security payments, pay soldiers on the field in Iraq and Afghanistan, and other issues.

Not raising the debt ceiling would be "catastrophic," Mr. Orszag said. "If we go over the edge on the debt ceiling, we will have substantially endangered this economy, may well throw the economy back into recession. This is not anything one wants to play around with."
He said that in mid May Mr. Geithner would have to start "deploying emergency measures" to avoid defaulting on the federal government's debt. He did voice confidence that the ceiling would be raised, but not without a fight.

"I don't think we'll raise the debt ceiling without experiencing some temporary turbulence in financial markets; but we will raise it after experiencing it. I think the analogy is: Don't forget what happened when TARP was enacted. The bill failed the first time through the House. Only after the severe financial market response did the bill then pass."

Mr. Orszag went on to say a temporary federal government shutdown this month might have been good preparation for the more serious debt ceiling fight. "It was probably unfortunate we didn't temporarily go over the cliff on a government shutdown. The backlash would have been useful, as this is less important than the debt ceiling."

The former director of the Office of Management and Budget also devoted time to a discussion of American political culture, which he said was more polarized than ever, in part because we are separating ourselves -- both physically and in terms of our news exposure -- from those we disagree with.

"We increasingly segregate ourselves residentially by party. In the United States in the 1970s, 25 percent lived in a county that swung hard one way or the other [in presidential elections]. Now well over half of us live in counties that swing hard one way. Our political system is hyperpolarized. That is at the core of the problem over the debt ceiling."
Mr. Orszag lamented the rise of the blogosphere in that it has allowed many to avoid views they dislike. There is a risk with the proliferation of news sources that "facts do not matter at all," he said. "When we hear something on TV or read it in print, our default is to assume it's true," a product of a bygone era when the Walter Cronkites of the world could be depended on for honesty.

Pivoting to the upcoming fight on the 2012 budget, Mr. Orszag called the Paul Ryan budget blueprint now embraced by the G.O.P. a "gift to the Democrats," in that it was too extreme, fundamentally changed the Medicare program to a voucher system, and ultimately actually raised health care expenditures by giving consumers total control over their health care, forgoing the bargaining power held by the federal government over Medicare costs.
He said a better way to improve the federal government's debt picture would be to simply allow all of the Bush tax cuts of 2001 and 2003 to lapse. The cuts were extended until 2012 in a deal struck between President Obama and Congressional leaders in December.

"If we did away with all of Bush tax cuts, we'd raise somewhere between 1 and 1.5 percent of G.D.P. That would basically eliminate the gap in the 5 to 10-year window between our current path and a more stable one."

And since the cuts will lapse without Congressional action, Mr. Orszag said only 34 Democratic votes in the Senate -- to vote against overriding the President's veto of an extension of the cuts -- were needed to massively improve the nation's budget outlook.